Is the IRS Going Out of Business?

         I got on the elevator at my office this morning with a little white dog. It was pouring rain and it had a tiny blue raincoat on. I tried to decide whether it was a service dog but it didn’t look like it was doing anything except shaking off the rain. The owner was a young guy who was trying to shed the rain off his coat as well. I couldn’t resist asking him what the dog was doing here. “It’s for morale” he said. “Oh, well that’s important” I said. I was dripping wet also. I had come in with the intention of dictating this bar bulletin. That tiny dog gave me my intro. In the last few months the Commissioner of Internal Revenue has been telling Congress that the agency is basically going broke. Audit examinations are declining quickly. Last year’s overall exam rate was a tiny .86% which means one out of every 116 tax returns. The IRS performed less than 160,000 fewer audits in 2014 than they did in 2013. And it gets worse. The IRS audit staff has been reduced by more than 600 revenue agents. That’s where the little dog came in. What is it like these days to be working for an agency that doesn’t seem to have the support of the U.S. Congress? When staff is reduced the remaining agents are expected to pick up the slack. Of course human nature drives down morale when this happens. By the way the drop in examination coverage applies to all income classes. For tax filers with income under $200,000 it’s a drop of 12%. With no statistics it’s clear that the audit rate for business returns has also declined. It’s hard to imagine that audit rates have been significantly lower in prior years. Back in 2000 only .49% of all individual tax returns were examined that’s less than one in 200. When IRS does the calculation of its audit rates however it only counts in person exams and correspondence audits by service centers. Many more taxpayers get notices from IRS about mismatches in their 1099s and W-2 information. But the reality is the morale at the service must be terrible. Should you have occasion to discuss a client’s tax case with an agent, you’ll see for yourself. What it means is agents will most likely not have as much heart in their job and that smaller cases will probably not be pursued. The agency is requesting an additional $2 billion for fiscal year 2016 but given the Republican controlled House and Senate it doesn’t look like the IRS will be getting much of an increase. I wonder if that little dog would mind commuting to Washington DC. You know morale is important.